Oakland voters will likely be asked in November to approve higher taxes to halve a $42 million deficit, but even if they agree, the city will face an even deeper crisis within months.

Ballooning pension costs will push the city's projected deficit to $58.7 million by July 2011.

The biggest portion of that budget shortfall is a debt payment of $43.9 million due July 1, 2011, to the old Police and Fire Retirement System. The payment would be more than 10 percent of the roughly $400 million city budget.

The looming crisis prompted great concern at last week's meeting from two council members, Pat Kernighan and Ignacio De La Fuente. When the council refused to ask staff to prepare a report on the impending budget woes, the typically mild-mannered Kernighan did not restrain herself.

"If that doesn't happen, you guys are crazy and irresponsible!" she exclaimed.

Kernighan said voters will not approve an $18.2 million public safety parcel tax, which would require a two-thirds vote, if they understand that the budget problem will only worsen later.

The council is considering placing the parcel tax and a $2.4 million utility users tax, which would require a majority vote, on November's ballot to help reduce the $42 million deficit projected for the fiscal year that begins July 1.

Single biggest issue

The costs of benefits to retirees appears to be the single biggest issue facing Oakland. Not only are the costs growing, but the city has not been funding them adequately, some council members said.

Last year, Oakland was supposed to pay $85.7 million for retiree medical care, according to a city staff report. But the city only paid $12.5 million, the report said.

"This is not sustainable," said De La Fuente. "There's no way that those things can continue."

Part of the city's problem is that tax revenues - including sales, hotel and real estate taxes - have been plummeting. The other is that the investments that undergird the pension system have lost much of their value during this recession. But the scale of benefits are fixed. The Police and Fire Retirement System, at the center of next year's budget woes, is one of the pension funds that is threatening to swamp the city's budget.

It was created for police and fire employees hired before July 1976. There's only one active employee eligible for the system and 1,194 retirees or spouses receive those benefits. The plan pays up to 66.7 percent of salary. The salaries, however, aren't based on pay from the 1970s or '80s. Instead, they're based on current pay.

Current pay

"If you were a captain who worked the graveyard shift, your pension would go up if the salary of a captain working the graveyard shift goes up now," said City Administrator Dan Lindheim.

This generous pension system, known as PFERS to city officials, was approved by Oakland voters in 1976.

But the recession has bludgeoned the pension's investments. Between July 2007 and July 2009, the PFERS fund lost $219 million - or 38 percent of its value.

Adding to the city's woes is that in 1997, Oakland issued a bond that relieved the city from using its general fund to pay its PFERS obligations. But that break ends July 1, 2011, at which point the city will have to pay PFERS from the general fund.

City staff have proposed a solution: issue another bond. But that idea has some council members concerned.

"We want to make sure that that proposal doesn't push this off to the future so future residents don't have to pay for it," Councilwoman Jane Brunner said in an interview.

Police and fire unions point to the millions they've already volunteered in pay and holiday concessions last year.

Nonetheless, De La Fuente sees no option but to ask the police and fire unions, who have closed contracts, to voluntarily start changing the pension system.

He wants a two-tier system, where new hires get lesser benefits.

In addition, police are currently the only city employee group who do not contribute to their pension. Firefighters contribute 13 percent of their salaries, nonsworn city employees contribute 8 percent.

"I believe that it's in their best interest to control the costs," said De La Fuente.